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CBA Case

Commonwealth Bank of Austr Australia alia

Figure 1: https://www.crikey.com.au/2019/02/05/banking-royal-commission-report/

In February 2019 newspapers took aim at the financial services industry in Australia. The release of report of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, known as the Hayne Royal Commission, on February 4th sent shockwaves through a sector. Banks are a crucial part of the Australian economy, their services make up 2.9 per cent of everything Australia produces, and despite Australia having a population of only 25 million people, pre-tax banking profit here ranks 6th in the world. The 1000-page report produced by the Hayne Royal Commission had brought to light systemic negative issues in behaviour, culture and practice. The Report made 76 recommendations and 24 referrals for further action, including criminal charges. Commissioner Hayne was very clear in his opening chapter as to where accountability lay: There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management. The report argued that effective leadership, good governance and appropriate culture are fundamentally important for the successful, and ethical, running of financial institutions. Hayne also noted that culture, governance and remuneration are closely connected. Staff are not only motivated, but directed, through remuneration policy and practice. One banking product that came under scrutiny during the Royal Commission was the selling of consumer credit insurance (CCI). CCI is insurance that covers you if something happens that affects your capacity to meet the payments on your loans and other credit. CCI usually covers situations of unemployment, illness, involvement in an accident, and death.

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CBA Case

Between 2011 and 2018 Australian financial institutions sold almost $5billion worth of CCI, yet only paid out $1billion in claims. The banks and other institutions signed up unsuspecting customers who believed the insurance would cover their mortgages, credit cards and other kinds of loans if they got sick, had an accident, lost their job or died. Little did they know the hurdles to claims were so high that most would be rejected. It was “hugely profitable but grossly unethical.” Described as a “profit before people culture”, the selling of CCI involved aggressive sales tactics and staff who were incentivised to sell as many products to as many customers as they could. The shift from banks as being ‘pillars of the community’ to ‘public enemy number one’ did not happen overnight. Over decades the financial services sector shifted in response to economic, political and social changes, adapting their strategy, policy and practice to outperform their competition and deliver returns for their shareholders. As a result, according to the Royal Commission, they shifted away from the six underlying principles, or norms of conduct, that the Banking Royal commission identified as essential: 1. obey the law; 2. do not mislead or deceive; 3. act fairly; 4. provide services that are fit for purpose; 5. deliver services with reasonable care and skill; and 6. when acting for another, act in the best interests of that other. Banks and the financial services industry are crucial elements not just in Australia’s economy, but in the life of all citizens. Banks carry significant risk for society, they manage assets in excess of 250% of Australia’s GDP, but are also in a privileged position in our community. For example, Australian banks were backed by the government during the global financial crisis. The Australian Parliament notes: Banks are not just like any other business. They are essential utilities. People cannot function in modern society without adequate access to the banking system. They are an integral component of society’s institutional infrastructure. This has traditionally given banks a certain degree of status and privilege, and this has survived deregulation to a large extent. This conveys an obligation to the community. CBA Board Chairman Catherine Livingstone has said that the financial services industry carries the most significant risk for society. The degree of regulation, and the fact that banking centres on the financial wellbeing of individuals, mean that the impact of any misconduct on consumers can be devastating. How did we get to the point where banks appear to have lost their commitment to their community obligations? The case of the Commonwealth Bank of Australia (CBA) can help us answer this question because while all the big banks came in for heavy criticism, it received a particularly damning assessment in the Hayne Inquiry final report.

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CBA Case

Commonwealth Bank The Commonwealth Bank of Australia (CBA) is the largest of Australia’s ‘Big Four’ banks. With its distinctive logo, a yellow diamond, with a black slice out of one corner representing the stars of the Southern Cross, it is recognised as both the most valuable and strongest brand in Australia. Prime Minister Andrew Fisher established CBA in December 1911. Its first branch opened on Collins St, Melbourne in July 1912. For the first fifty or so years of its operation, CBA was both a trading and savings bank but also Australia’s central bank. This changed in 1960 when CBA passed central banking operations to the newly formed Reserve Bank of Australia. In the 1970s banking in Australia diversified. CBA established its own finance company and expanded into insurance and travel. By the 1980s, plastic debit and credit cards entered the market with CBA, while the first automatic teller machine was launched in 1981. At the time of these new technological and business changes, the political and economic landscape of Australia was changing. From the mid-1970s, deregulation began in the Australian banking industry. The Final Report of the Campbell Committee of Inquiry into the Australian Financial System, released in late 1981, facilitated several changes that aimed to free up the financial services market. Deregulation meant there was a shift from regulating financial activities directly to achieve monetary policy. Instead, after deregulation, banks and other financial institutions had much greater freedom to respond to competitive market signals and customer requirements, subject to meeting minimum prudential standards designed to protect customers and maintain financial market stability. Deregulation included actions such as floating the Australian dollar and allowing foreign banks to enter the Australian market. Sixteen foreign banks commenced trading in Australia from 1985, immediately doubling the number of banks operating. Competition in the financial services industry became fierce. In the 1990s a new threat to traditional banks appeared, as mortgage intermediaries such as Aussie Home Loans and RAMS, life insurance companies and global financial services companies all started to offer home loans and financial services at low rates. In 1990 CBA merged with the State Bank of Victoria to become the largest bank in the country, leading the market in retail banking operations. Between 1991 and 1996 deregulation of the banking sector culminated in the privatisation of CBA, with the federal government offering shares to the public. By 2018 CBA had the largest branch network in Australia with over 16 million customers and nearly 50,000 employees. Today it leads the market in home lending, household deposits and credit cards and has over 830,000 shareholders. Structurally, the role of the CBA board is to provide leadership and strategic guidance for the organisation and delivery of its purpose. The key responsibilities of the Board are to: set the strategic objectives and risk appetite of the bank, and lead the culture, values and behaviours that deliver them; appoint the Bank’s Chief Executive Officer (CEO); and to oversee the management, performance and corporate governance frameworks of the Bank. In reality, the Board provides oversight and governance and it is the CEO and executives within the organisation who maintain control over organisational practice. While the board may approve policy, for example, the way these policies are interpreted and implemented is

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the domain of the staff within the organisation. Part of the CEO’s role is to lead the culture and balance it across different functions. CBA's organisation is vast and complex. With both horizontal and vertical division of resources along Business Unit and managerial lines. The Corporate Governance Framework (Figure 3.) shows some of the managerial layers, but also the integration of policies, processes, people and culture.

CEO

Corporate/Shared functions IT, HR, CFO, Risk Management, Corporate Affairs

Retail Banking Services

Buisness & Private Banking

Institutional Banking & Markets

Wealth Management

New Zealand (ASB)

International Finanical Services

Figure 2 & 3: Derived from Commonwealth Bank of Australia. (2019) 2018 Annual Report. Retrieved from https://www.CBA.com.au/content/dam/CBA/about-us/shareholders/pdfs/annual-reports/CBA-2019-AnnualReport.pdf

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From tellers to sellers How did the changes in the banking environment lead to changes at CBA? Looking back, David Murray was CEO of CBA from 1993 to 2005 and oversaw many of the changes that occurred due to financial deregulation and increased competition. The challenge faced by CBA was ““How do we make sure that we put our customer in front of the right product specialist at the right time? How do we get better at making and converting referrals in the best interests of our customers?” These questions were influenced by the vast geographical spread of CBA with many local differences and previously competitive business units. Intent on increasing sales and cutting costs, Murray introduced the "Cohen Brown method" of sales and service. Cohen Brown Management Group, a corporate consultancy firm that focusses on delivery of training solutions developed a front-line sales and service training system for the bank, which aimed to increase the share of customer spend, market share, retention, and customer satisfaction. The Cohen Brown method was ‘all-pervasive’; staff were encouraged to spend more time with customers, cross-selling products and making referrals. Cohen Brown called their program OneBankism, but CBA referred to it internally as OneTeam. The program put CBA’s executive team at the forefront of cultural change and cascaded it through the organisation rapidly. Roni Rutland CBA’s Executive Manager, Performance Strategy at the time stated: We said, let’s make sure our employees are fully aware that OneTeam is not just another training initiative, but instead a profound strategic change led from the top. So we took the essence of the Cohen Brown videos and re-shot them with our own executive management team. That means that in every OneTeam session, it is our own leaders who are voicing the principles of OneTeam. OneTeam cascaded from the top of the organisation, Phase 1-3 focussed on executive general managers, or those who reported directly to the CEO and then their direct reports, before rolling out to all front-line management and staff across the organisation. The key principles in OneTeam involved ensuring that front-line staff had the right skills for identifying customer needs and probing for opportunities outside their own lines of business. Staff were also trained in a Cohen Brown customer needs analysis profiling process. This involved asking probing questions to uncover customer needs, assessing those needs and then delivering on them through referral to the relevant business units. In addition to an organisation-wide training initiative, CBA business units created formal agreements to outline how they would provide quality referrals to the proper specialists, who were often in other areas or departments, and how they would handle referrals they received to reflect well on the referring party. CBA’s 2007 Annual Report outlined one of the key strategies:

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The embedding of our Sales and Service culture has remained a priority. In particular, we have placed emphasis on training our front-line people where we have focused on disciplines around customer needs analysis, business referral initiatives and taking ownership and following up…We have introduced a new operating model into the retail branch network, giving our branch managers greater autonomy, which will better meet the needs of our customers and our people. As part of the focus on sales and service front line staff had to attend meetings at the beginning and end of each day. In these meetings employees were required to publicly commit to the achievement of their daily targets. At the close of business, if they didn’t achieve their defined targets some staff reported they were belittled or called out in front of their peers. During the 2000s, CBA closed branches and cut 3700 jobs, achieving savings of $1.5 billion. While executive salaries increased for meeting cost-cutting targets, branch and call centre staff faced increasingly challenging sales targets. Branch Manager Ann O’Farrell told BRW in 2004 "Every bank has customer service targets; they are part of business. But I would say in the Commonwealth Bank they are being grossly misused. People in the bank think about the targets, not the service.” Bonuses, typically paid once a year for the previous year’s achievement of results, could far exceed base salary. The timing and size of bonuses became an incentive, not just to remain with the organisation, but to potentially ‘game’ the system. Some within CBA suggested that the relentless focus on sales and commissions meant those such as financial planners - and senior management - were often at loggerheads with the bank's compliance staff, who were there to make sure standards were met. In 2014 the Financial Services Union conducted interviews with over 800 CBA staff. National Secretary Leon Carter said there was repeated evidence of workers suffering stress, with more than half of the respondents saying they had to work overtime to achieve their performance goals. In Queensland, a staff member said the falsifying of credit applications was "widespread in our area". The staff member said they brought these issues to the attention of management, who already knew about it. "Is this not fraud … Don't we get dismissed for this conduct? No satisfactory answer was given." Internal CBA research, overseen by the CEO, found that staff valued job security, career advancement and a positive environment. People were “intrinsically motivated by feeling that they are helping customers and playing their part in a winning team.” However, the remuneration system, for both front line, managerial and executive staff, was built on the premise of maximising money coming into the organisation. In 2019, CBA strategy was outlined in their Annual Report (Figure 4), with an emphasis on balancing outcomes for shareholders, customers, staff and the broader community. Not everyone, however, was happy with the performance of the banking sector. Focus on

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profitability and shareholder return was potentially driving behaviours that were not in line with community expectations.

Figure 4: Commonwealth Bank of Australia. (2019) 2018 Annual Report. Retrieved from https://www.CBA.com.au/content/dam/CBA/about-us/shareholders/pdfs/annual-reports/CBA-2019-AnnualReport.pdf

While CBA data showed that customer satisfaction increased from 70.1% in 2008 to 84.2% in 2015, some questioned whether the focus on customer satisfaction neglected attention on dissatisfied customers. Further consideration of those with less positive experiences may have highlighted ethical breaches that were occurring in the financial system. A 2019 University of Melbourne Report highlighted that one in three consumers were dissatisfied with their financial institution, with trust being a major concern. According to this research 54% of consumers had issues with their financial service provider in the last five years. Pressure began to mount in 2016-7 with media, consumer groups and members of parliament making calls for a Royal Commission into the financial services industry. A shortlist of just a few of the CBA transgressions identified by regulators and media in 2016-7 included: • Outdated definitions of the term ‘heart attack’ used to avoid paying out life insurance settlements and $100 million in fees charged for ‘no service’; • A PwC report into home lending found problems with lack of verification of borrowers’ financial circumstances; • $10 million refunded to customers who were sold unsuitable credit card insurance; • ‘Smart’ ATM machines that were used by criminals to launder millions of dollars - the bank paid the largest civil penalty in Australian history; • ASIC took the bank to court in January 2018 for ‘unconscionable conduct and market manipulation’ over the bill swap rate (used by banks to settle debts with each other).

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The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry On the 30th November 2017, Prime Minister Malcolm Turnbull announced the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission.) Lasting 12 months, with a budget of $75million, it was chaired by former High Court Judge Kenneth Madison Hayne AC. Only two weeks after the announcement Hayne wrote to sixty-one financial institutions, regulators and industry associations (including CBA) asking them to describe any misconduct they had become aware of over the previous decade and the steps they had undertaken to fix it. Over the next 12 months, the Royal Commission conducted seven rounds of public hearings over 68 days, called more than 130 witnesses and reviewed over 10,000 public submissions. One key issue presented to the Royal Commission concerned the practices surrounding the sale of insurance products associated with financial services. Consumer credit insurance, or CCI, at CBA came in three forms: credit cards, personal loans and home loans. During the Royal Commission Clive van Horen, CBA’s Executive General Manager of Retail Products, explained the selling of CCI products. Not only did staff have part of their salary aligned to the achievement of performance targets, such as sales goals, but the organisation also awarded different prizes for sales success. For example, a 2012 promotion awarded iPads, iPhones, gift vouchers to staff for selling the most insurance over a specified period. A 2011 ASIC report found that 20% of customers who purchased CCI had not 'actively sought it out' – instead it was sold to them without their knowledge or consent. Staff often used pressure tactics, harassment or ‘misleading representations’ to convince customers to take out CCI. The Banking Royal Commission found that products were sold to ‘unsophisticated customers’, an example being insurance sold to a customer with an intellectual disability. In 2014 Matt Comyn, then head of retail banking, raised concerns with the CBA executive team that these products were of ‘lower value’. A risk ‘deep dive’ by the bank in 2013 also raised multiple concerns over these products. An internal CBA audit conducted in 2015 found 64,000 customers had been sold protection on their credit cards when they weren't eligible to claim – primarily due to being unemployed or working below the minimum number of hours the policies required at the time they bought the insurance. In May 2015 Comyn had a meeting with Ian Narev, the CEO he would later succeed. Comyn advised that more than 100,000 customers might have been sold insurance under false pretences and presented a list of reasons why CCI products should be killed off within the bank, including ...